Cost of debt could rise in May

The Bank of England`s base rate could rise as early as May, an article from Reuters indicates, which means the cost of servicing many debts would go up sooner than a lot of people thought.

There`s a `growing minority` of analysts who believe that the base rate could rise much earlier than expected - even though the Bank `is still set to raise interest rates from the fourth quarter`, the article says.

A recent poll (of over 60 analysts) showed that on the whole, the base rate`s expected to go from its current 0.5% to 0.75% in the final three months of 2011.

But more than a third of the people questioned said they saw a rise coming in the third quarter of the year or earlier - and Ross Walker of RBS said that we could "see a May hike getting priced in quite soon".

After all, the latest figures show that inflation hit 3.7% in December, which is almost twice as high as the target rate set by the Chancellor.

If inflation goes up too high, the Bank may feel it has to raise the base rate, encouraging people to save more - and borrow and spend less. This can hold prices down, which means the inflation rate comes down.

For people with debts, though, it could be bad news. Someone on a tracker mortgage, for example, will see the monthly cost of servicing their debt go up when the base rate does.

A spokesperson for debt management company Gregory Pennington commented: "Rising interest rates would be good news for many savers, but not for borrowers. Still, it`s good to see that many people have taken advantage of the period of low rates - and the resulting low mortgage payments - to really work on reducing their debts."